This Q&A is from DTCC's Customer Quarterly publication, available as downloadable PDF.
In a rapidly changing financial landscape where unprecedented threats of risk are posing new and complex challenges every day, DTCC’s Equities Clearance Group is utilizing its 30+ years of experience to provide certainty, reliability and stability for trading firms navigating these rocky times. For an average of just 66 thousandths of a cent ($0.00066) per 100 shares, DTCC (through its clearing agency subsidiary, NSCC) provides the lowest cost in the world for trade clearance. In addition, we offer an unparalleled level of risk management, a straight-through process to settlement, fail management, automated buy-ins, enormous processing capacity and business continuity as well as access to a wide range of world-class services.
Q. How much does it cost per 100 shares for equities clearance through DTCC?
A. DTCC’s members pay the lowest equities clearance fees in the world — an average of just 66 thousandths of a penny per 100 shares (or a third of a penny per transaction). In fact, DTCC’s fees represent just a fraction of the cost of trading. And because we take advantage of economies of scale and critical mass, we’ve reduced fees 64% since 2005, even as market volume has doubled, saving trading firms millions of dollars a year.
Q. How do DTCC’s clearing fees compare to fees in the fragmented system still used throughout Europe?
A. A centralized post-trade infrastructure produces significantly lower fees in the U.S. compared to a fragmented system like Europe’s. For example, Europe’s average clearing fees are more than 11,000% higher than in the United States — US$0.34 per side compared to just $.003 per side here. In other words, European trading firms are paying millions of dollars more every year to clear trades under a fragmented system.
Q. What are the factors that make clearing through DTCC so cost-effective?
A. A key reason is that we operate as a user-owned, user-governed, at-cost model, which means the industry owns us — and therefore our members pay only the cost of clearing without any profit margin. We return all revenue above our operating costs to our customers in the form of rebates, discounts and fee reductions. Also, trading firms benefit from the critical mass provided by DTCC’s clearing model. Because the operating costs of the Equities Clearance Group are relatively fixed, as transaction volumes increase, the unit cost of clearing decreases. In fact, we cut fees twice last year and four times in the last three years, due, in large part, to higher volumes resulting from market volatility.
Q. Does DTCC subsidize its other subsidiaries, including newly launched business lines, with revenue from the Clearance Group?
A. No. The clearing fees paid by our customers are dedicated exclusively to clearance services. Not one penny is directed to any other area of the company.
Q. With processing volumes increasing annually, has there been a corresponding increase in operating costs for the Clearance Group?
A. The annual operating cost for equities clearance for the entire U.S. equities market, which includes more than 50 exchanges, ECNs and ATSs, has actually remained flat over the past three years and stands at less than $100 million. This includes costs for IT, staff, risk management and business continuity planning. We’ve been able to hold the line on costs thanks to tight fiscal and management controls. For instance, the Clearance Group handled a record 13.5 billion transactions last year with a staff of just 291 employees, which represents only about 10% of the total DTCC workforce.
Q. Is price the most important factor in evaluating clearance services?
A. While price is certainly important, risk management and business continuity are the most critical services provided by a central counterparty, especially during periods of extreme market volatility. DTCC offers the most comprehensive risk management and business continuity programs in the world. And when the markets are in turmoil, those two factors alone could potentially save financial firms billions of dollars a year.
Q. What makes DTCC’s risk management system the most comprehensive in the world?
A. Managing risk is essential to maintaining stability in the marketplace and protecting our members under both ordinary and extraordinary circumstances. As a central counterparty, DTCC mitigates risk for the buyer and seller, guaranteeing trade completion even if one side defaults. Also, DTCC ensures the soundness and solvency of trade partners by, among other things, maintaining rigorous standards for membership, requiring financial disclosure, and conducting financial surveillance of participants. DTCC’s extensive experience managing risk is what separates us from every other CCP in the world.
Q. In recent months, DTCC has managed unprecedented risk issues, especially with the bankruptcy of Lehman Brothers. Did past experiences prepare the Clearance Group for this complex challenge?
A. No other clearing firm in the world has more experience or been as successful as DTCC in mitigating risk. Over the past 30 years, we have effectively managed risk for financial firms during major events like the wind down of Refco Securities, the failure of Adler Coleman and the takeover of Bear Stearns. And we have used these experiences to develop new capabilities to identify potential risk hot spots and protect our members. Also, we regularly stress-test our systems and “war-game” major disruptions so that we are fully prepared to respond to and manage unexpected shocks to the markets — like the bankruptcy of Lehman Brothers. On an issue this critical to the safety and soundness of the industry, there is no substitute for DTCC’s experience.
Q. We know that certainty and reliability are essential to maintaining the stability of the financial markets. Has DTCC ever failed to clear and settle equity trades?
A. No. Traders can be confident that their transactions will be processed without disruption because our systems are so resilient that we have never experienced a service interruption that prevented clearance, even on September 11, 2001, or when stock markets have experienced delays. Financial firms and investors demand that degree of service, and DTCC has lived up to its commitment every day for more than 30 years.
Q. What is DTCC’s current processing capacity?
A. Just recently, we boosted our capacity to 450 million sides per day, up from 280 million – and we achieved this while still giving back a significant fee reduction to our customers. Trading firms benefit today from the investment DTCC has built over the years in its technology infrastructure, which now provides the capacity to handle increasing and sustained trading volumes — including spikes in volume — at no additional cost to traders or their clients.
Q. Is capacity of 450 million sides per day sufficient as marketplaces and trading strategies evolve and, as a result, volumes continue to surge?
A. DTCC regularly increases capacity to keep ahead of rising volumes of transactions. In fact, since 2004 we’ve increased capacity 900% — from 45 million sides per day to 450 million today. Our enormous capacity can fully accommodate sophisticated new forms of trading, including algorithmic trading, without increasing clearing costs for trading firms. We are committed to ensuring that the post-trade infrastructure keeps pace with the rapid changes taking place across the financial services industry.
Q. With the threat of terrorism and potential system outages always a concern, how does DTCC ensure its customers that their trades will be cleared and their information is secure?
A. If you clear your equities transactions through DTCC, you can have full confidence that your trades will clear — and your data will be secure — regardless of external events. Included in DTCC’s low fee structure is an unparalleled level of security protection and data recovery compared to any infrastructure organization in the world. We maintain multiple operating centers and backup data storage facilities that are online 24 hours a day to guarantee your trading information is always secure. And in recent years, we completed major breakthroughs in data transmission replication from backup data centers thousands of miles apart, reducing the potential window of lost data from 2 hours to less than 2 minutes.
Q. Do the business continuity initiatives include certainty of communication between traders and DTCC, as well as safety of confidential information?
A. Traders are guaranteed the continued free-flow of information — and the clearance of transactions — when using DTCC’s highly resilient, self-healing telecommunications network. And DTCC’s highly architected computer system provides the most comprehensive security to protect data we hold on behalf of financial firms.
Q. When DTCC says it is industry owned, who exactly does that refer to?
A. DTCC is owned by you, our customers, and acts as a market-neutral utility to the financial industry. There is still a misperception among some that DTCC is owned exclusively by the exchanges or that we show a preference for one exchange or trading platform over another. Nothing could be further from the truth. DTCC serves all customers equally and without bias — for instance, small and large firms pay the same fees.
DTCC clears for over 50 ECNs, ATSs and exchanges, receiving roughly 90% of all transactions in real time. Since our position is agnostic, trading platforms can freely compete without having to worry that other platforms or markets will use the bundling of execution and clearing fees against them.
Q. Does DTCC’s centralized model reduce costs for financial firms that access other services you provide?
A. Yes. Financial firms save money when they utilize a single connection to access DTCC’s full range of post-trade processing services, including those in the areas of fixed income, mutual funds, OTC derivatives and insurance.
Q. Why did the industry previously reject a fragmented clearance system?
A. Market participants realized that commoditizing the back-end of operations would reduce costs, mitigate risk, lower collateral requirements, and eliminate inefficiencies. Between the 1970s and 1990s, the regional exchanges closed their own clearing corporations because DTCC’s post-trade infrastructure yielded the operational, risk and cost benefits that were promised.
Q. Would returning to the fragmented system of decades ago harm the industry?
A. Yes. A fragmented system would increase systemic risk at the very moment we are facing the worst financial crisis in the history of our nation. It would also increase overall operating expenses for financial firms that would face higher costs for collateral and connectivity. It makes no sense to turn back the clock to a system that has already been rejected by the industry.
Q. How else would a fragmented system negatively impact financial firms in the U.S.?
A. A fragmented clearance system would create complex and unknown systemic challenges in risk management for market participants. For instance, DTCC provides a central point to monitor and manage risk — and we can take immediate steps to protect traders and their clients when we identify unusual volatility in a firm. If market activity was spread across two or more clearing organizations, the industry would lose that critical insight and be significantly more vulnerable to threats of risk.
For more information, contact Susan Cosgrove, managing director & general manager, Equity Clearance & Settlement, at 212-855-7612 or DTCC Relationship Management at 1-800-422-0582.
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